Getting Even With ExxonMobil

It is no secret that consumers are suffering from very high gasoline prices. And as a result of these high prices, ExxonMobil just reported a first-quarter profit of $10.7 billion — 69 percent higher than a year ago. The national level of disgust and anger is approaching record levels as we watch the loss of our hard-earned dollars become Big Oil’s gain. The question is, what are we going to do about it?

Before discussing how to deal with this, we should first discuss what it is that we are actually trying to do. I believe the very simplistic view is that by going after the oil companies, they are going to relent and lower gas prices. Thus, their profits will return to ‘normal’ levels along with our gas prices. We want a return to the good old days of sub-$2/gallon gasoline. But most of the proposals that are being floated won’t do anything to relieve high gas prices, although they may have an impact on oil company profits. If that’s the case, then what is the point? I would say that it is simply feeling like justice was served. We want to get even with Big Oil.

Take Their Subsidies

It seems preposterous that an industry as profitable as the oil industry receives subsidies. But does anyone know what they actually are? CNN just did a story breaking them down, and you might be surprised at some of the other companies that benefit from these ‘Big Oil’ subsidies.

But we should also ask “What is the subsidy supposed to accomplish, and what is the impact of removing it?” It isn’t a question of whether a company making billions in profits “needs” a subsidy. Even companies that make billions of dollars evaluate projects on a case-by case-basis. Some of those projects may have poor economics, and companies won’t use billions in profits to subsidize projects with poor paybacks. So the question is, “Is the subsidy encouraging the company to do something that we would like them to do, and that they otherwise would not do? Is the net impact to create more jobs and tax revenues?” Those are the questions that should be asked, and if the answer to those questions is “No”, then that subsidy would appear to be a waste of money.

Section 199 – The Biggest Subsidy

The biggest ‘oil company subsidy’ — amounting to $1.7 billion per year for the oil industry — is a manufacturer’s tax deduction that is explained in Section 199 of the IRS code. This is a tax credit designed to keep manufacturing in the U.S., but it isn’t limited to oil companies. It is a tax credit enjoyed by ethanol companies (have you ever heard anyone call it an ethanol subsidy?), computer companies (we are subsidizing Microsoft and Google!) and foreign companies that operate factories in the U.S.

One never hears of proposals to entirely do away with Section 199. Apparently, since this tax credit was designed as an incentive to keep manufacturing in the U.S., many would feel that eliminating it for all companies would provide less incentive for them to keep their factories in the U.S. Some of the same people apparently don’t believe this reasoning will apply with the oil industry.

So, the proposal is to disallow a tax credit to Texas-based ExxonMobil for their U.S.-based refining operations, while leaving it in place for foreign-based firms like Mercedes, BMW, and Toshiba that operate factories in the U.S. After all, as one staffer from the Center for American Progress smugly (and naively) put it in the CNN story, “What are they going to do, move the oil field to the North Sea?” Exactly. They are trapped and there isn’t a thing they can do about it. They can’t move their oil fields, so we can tax them silly. Nor can they move their drilling rigs or refining operations. Wait, I guess they could move those, but will they? Well, this is the same model Hugo Chavez used to mismanage Venezuela’s oil industry into the ground and dry up foreign investment in the oil industry there. He thought that since foreign oil companies were trapped, he could tax them at will. Instead, they just left.

If we make it less profitable for oil companies to operate here than in foreign countries, surely they wouldn’t shift operations out of the U.S. as Halliburton did in 2007. OK, they might, but so what? It’s Big Oil we are talking about here. Who cares if they leave the U.S.? At least if we shift those refining jobs in Texas, Louisiana, and California to the new refineries being built in Saudi Arabia, we will no longer have to listen to reports of windfall profits, since Saudi Aramco doesn’t publicly disclose their profits.

Other Subsidies

Another category of subsidies is a percentage depletion allowance. It is worth about $1 billion a year for U.S. oil companies. Again, it isn’t limited to oil companies; other extractive industries are able to take the percentage depletion allowance. It is similar to a depreciation allowance in other businesses. What will be the net impact of eliminating this subsidy? It will make the costs of operating a well somewhat higher, which will probably mean that wells will stop producing at an earlier stage than before. After all, over time as wells are depleted the oil becomes more expensive to extract. It stands to reason that if the costs are even higher, the wells won’t produce as long. However, much higher oil prices should provide an incentive to continue producing the wells longer than if oil prices are lower. But oil prices rise and fall, and the net impact will be to make an oil well in the U.S. less competitive against an oil well in Saudi Arabia. This will impact small producers more than Big Oil, but at least it will help realize the goal of getting more of our oil from foreign countries where we don’t have to read about windfall profits.

Another category is the foreign tax credit. Again, you may be surprised to find out that this ‘oil subsidy’ isn’t limited to the oil industry. But it is worth $850 million to the oil industry, and is designed to make sure that profits that have been taxed by foreign countries aren’t taxed again when they are returned to the U.S. Eliminating the foreign tax credit will provide an incentive for oil companies to keep the profits out of the U.S. and reinvest them abroad, helping to accomplish the goal of shrinking the U.S. oil industry.

The final category of subsidies covered by the CNN story is intangible drilling costs (IDC). Once more, like all other industries the oil industry is allowed to deduct the cost of things like wages and is worth $780 million per year. The story suggests that most businesses have to take these deductions over the lifetime of an investment, but the oil companies get to take these deductions all in the first year. Someone in the oil business recently explained how the IDC works at The Oil Drum:

“The elimination of the IDC tax credit would have a huge immediate effect. The IDC is a significant incentive to drill. About 40% of the cost to drill a well is IC (intangible costs). The IDC allows a company to deduct that amount from the taxes owed…not the earned income. So if a company owes the feds $100 million in taxes and spends $100 million in IC it can subtract $35 million (IC X 0.35) from its taxes. Definitely a huge break. So they only pay $65 million in taxes. But take note: the ICD doesn’t increase the company’s revenue or profits: it allows them to spend more money drilling. If they don’t spend it drilling new wells they lose it. That’s the logic behind the IDC tax credit: instead of letting the govt spend the money the oil industry gets to drill more wells. That was once considered a good thing. The effect on drilling activity: the economics of each project is evaluated on its own merits. This evaluation includes utilizing the IDC. Eliminate it and a number of projects become sub-economic and won’t be drilled.”

So the IDC credit clearly provides some extra incentive to drill, but are those extra incentives needed? President Obama says no, except in his recent energy policy speech in which he said the U.S. should be “finding and producing more oil at home” and that his administration would “provide new and better incentives that promote rapid, responsible development” of oil and gas. One might think an incentive that encourages companies to offset taxes owed by drilling more wells might be just such an incentive, but apparently the Obama administration knows better.

Bottom Line – 1.8 Cents Per Gallon

In a nutshell, a large chunk of Big Oil’s ‘subsidies’ are the same as those of Big Ethanol (which also has direct per gallon subsidies), Big Computer (Microsoft, Google, etc.), Big Auto, Big Pharmaceutical, and all the other industries large and small. They are not like their subsidies, they are in most cases the exact same tax deductions from the same tax code. The oil industry already pays an estimated $36 billion per year in U.S. taxes, and they have a higher tax rate than that of Microsoft or Google — both companies with higher profit margins than those of the oil industry. But those who argue that we preferentially eliminate, for instance, Section 199 and the foreign tax credit for the oil companies are in effect saying they have no problems subsidizing industries that are more profitable than the oil industry.

But let’s say we follow through and eliminate the $4 billion just for the U.S. oil industry. U.S. refineries currently process about 14 million barrels of crude oil per day, and $4 billion works out to be 1.8 cents per gallon of crude oil processed through those refineries. Is that going to reduce the price you pay at the pump? Of course not. Will it cut into the profits of the oil companies, “punishing” them as we hope to do? Perhaps. Will it treat the oil industry differently than other industries, some of which enjoy higher profit margins? Definitely. Will it provide an incentive for oil companies to shift manufacturing out of the U.S.? Will it shift some competitive advantage to Saudi Arabia and Venezuela, both of which we are already highly dependent upon for our oil? Yes and yes.

The Naive and the Hopeful

I get that it doesn’t seem fair that ExxonMobil’s record profits are coming out of our pockets. But the current proposals won’t do anything to combat what is coming out of our pockets. It will ensure that more of that profit — and the jobs that those profits support — is shifted to foreign suppliers. As much as people hate ExxonMobil, would they rather those profits were being reaped by Saudi Aramco? That is the alternative.

I understand that some believe that singling out the U.S. oil industry for punishment would help level the playing field for alternative energy companies. I think the dream of many is that if we make U.S. oil companies uncompetitive, the alternative energy sector will flourish and make up for the lost production from the oil industry. The future can be cleaner and greener and the only losers will be the oil industry. This is an incredibly naive view. In fact, look at the situation in Europe. Gasoline costs $8 to $10 a gallon, and cars are still predominantly fueled by petroleum. And it will be the same in the U.S. if gasoline rises to $10 a gallon.

There are effective ways of making renewable energy more competitive relative to oil. I have written about some of them. What the current proposals will do is to disadvantage U.S. oil companies relative to foreign oil companies. That means a shift alright, but not from U.S. oil to U.S. renewable energy. There will be a shift from U.S. oil to more foreign oil and refined products.

How to Really Get Even

It is nice to think that we can force Big Oil to sell fuel at the prices of a decade ago and limit their profits, but that isn’t the way the world works. Big Oil doesn’t have to sell fuel period if we single them out for punitive tax treatment. And if they don’t, we will get our fuel from Big Foreign Oil. After all, refineries do close and oil companies do go out of business.

The proposals that are currently being floated for singling out the U.S. oil industry for punishment as a result of their profits simply feed on the public’s anger at these companies. They don’t represent good energy policy; indeed they aren’t about energy policy at all. They are about revenge. We want to stick it to ExxonMobil — even though the proposals would if anything increase the price you pay at the pump and ensure that more of our oil comes from overseas.

But there is a way that every individual can stop feeding ExxonMobil’s enormous profits. Stop buying their product. The reason they are so profitable is simply that the public keeps buying their product even as the price has doubled over the past few years. I understand that we are all dependent to one extent or another on oil, but most people use more of that product than we need to. Because of changes I have made in my own life, even though Big Oil is making record profits, they are profiting less from me than they were a decade ago. That is because of personal choices I made that you can make too. You can become more fuel efficient. You can use your car for fewer trips. You can carpool and use public transportation. Those things will have a real impact in reducing your contribution to Big Oil’s profits.

But that would require that we make some actual changes, and our collective laziness is too great for that. We want to keep consuming as we always have, while sticking it to the companies that make that consumption possible. But if you won’t make any changes in your life, then you can expect to continue transferring an ever increasing portion of your budget to Big Oil’s coffers. We might be able to drive the domestic oil companies out of business — which by the way support an estimated 9.2 million jobs — but you are still going to pay more (to Saudi Arabia and Venezuela) unless you use less. Of course your other option is to buy ExxonMobil stock. If you can’t help but feed your money to the beast, you could at least invest in them and get some of that money back as their stock value appreciates.

Footnote

Some will view this as simply a defense of ExxonMobil’s profits. That is not the case. Nor is it a suggestion against changing the way they are taxed. The purpose of this essay is to make sure that people understand the nature of the tax breaks that are being referred to as oil company subsidies, and also to think through the implications of changing the tax code.

Personally, I don’t care if the way they are taxed is changed. But don’t do it to oil companies preferentially, and don’t do something to them that you aren’t going to also do to foreign competitors operating here in the U.S. The first is a case of fairness; if it is fair for ExxonMobil to pay even more income taxes, than why not Apple or Google, which have much higher profit margins? The second is a case of putting a domestic oil industry at a disadvantage to overseas competitors. If the economics are going to change for ExxonMobil’s projects in the U.S., then we have to make sure that we change the economics equally for foreign companies operating here.

Here’s an alternative to feeling anxious about enormous profits from companies like ExxonMobil.
Buy stock in the company!
As gas prices rise, you can use the money you made from investing in the company to help pay for the increased cost of gasoline.
I buy stock in oil companies every year with my Roth IRA contributions, and when I eventually retire, I’ll have a nice nest egg. (I also have a fuel-efficient hybrid vehicle, so that helps me avoid the shock of $4/gallon gasoline.)
We’ve got to stop attacking the oil companies for being profitable because they are one of the few sectors of our economy that consistently is yielding large, positive rate of returns on investment. Feel free to attack them for oil spills, but getting mad at ExxonMobil for making money is silly because you can be a stock holder of the company and join them in their profits.
RR,
Thank you once again for an informed discussion on the oil markets.

Your last paragraph about conservation/efficiency is spot on. And this applies to all energy consumption, not just oil. I assert that the easiest, cheapest solutions to our energy problems are via conservation/efficiency, but obviously not the only answer. In fact, I further assert that our overall energy problems cannot be solved without very significant reduction in energy consumption. Unfortunately, this gets short shrift in virtually all discussions of energy issues. Perhaps this is because conservation/efficiency is just not “sexy” compared to shiny new PV panels, wind turbines, etc. But perhaps it is really due to the fact that this requires folks to take responsibility for their own actions rather than blaming others.

But there is a way that every individual can stop feeding ExxonMobil’s enormous profits. Stop buying their product. The reason they are so profitable is simply that the public keeps buying their product even as the price has doubled over the past few years. I understand that we are all dependent to one extent or another on oil, but most people use more of that product than we need to. Because of changes I have made in my own life, even though Big Oil is making record profits, they are profiting less from me than they were a decade ago. That is because of personal choices I made that you can make too. You can become more fuel efficient. You can use your car for fewer trips. You can carpool and use public transportation. Those things will have a real impact in reducing your contribution to Big Oil’s profits.

But that would require that we make some actual changes, and our collective laziness is too great for that. We want to keep consuming as we always have, while sticking it to the companies that make that consumption possible. But if you won’t make any changes in your life, then you can expect to continue transferring an ever increasing portion of your budget to Big Oil’s coffers. We might be able to drive the domestic oil companies out of business — which by the way support an estimated 9.2 million jobs — but you are still going to pay more (to Saudi Arabia and Venezuela) unless you use less. Of course your other option is to buy ExxonMobil stock. If you can’t help but feed your money to the beast, you could at least invest in them and get some of that money back as their stock value appreciates.

I would also encourage another way.

Support small businesses. Large multi-national companies like Exxon, Chevron, BP and others in the energy sector really are not designed any longer to support the United States economy. Like Halliburton has demonstrated, these companies do have multiple ways to avoid paying taxes and engineer their business so that profits stay offshore and never come back into the United States unless absolutely legally required. Anyone who has worked extensively in international business and understands tax structures know these companies do not bring money “home” if it is not necessary. Look at the Hedge Fund industry and why most of them are offshore. It has nothing to do with the view that Bahamas is much more beautiful than New York. To think otherwise is silly.

As a small business, we have knocked on more doors for support than anyone could imagine. We have been in front of many multi-national energy and chemical companies. The fact is simple and clear. The energy and chemical markets are moving overseas and offshore. If it were not for the massive boom in horizonatal gas and oil technologies, the industry would be suffering hard and only the super majors would survive. This happened when natural gas prices hit $10-12 per mmbtu and small chemical companies were bankrupting by the month. The Dow, Dupont, etc. companies who were global and international survived. Local or regional US producers filed bankruptcy in record numbers. Watch what these high gasoline and crude oil derived chemicals do to the economy. Unless the prices come down quickly, the economy will not sustain high prices for long. I know Europe is paying $8.00+ gasoline prices, but they have a much different economy and central bank then our Fed system. Our debts are growing very quickly and it is being shouldered by the American public. Europe is handling it differently and not printing money at the rate our government is printing.

In the past 2 weeks all the major interest in our technology is from overseas. Saudi Arabia company made us our first serious offer. Qatar is now willing to support our newest technology to be released soon. UAE has been going back and forth discussing what do to with natural gas. Two large super majors outside America would like to consdier a project in a foreign country. The big energy companies in America have moved their technology development largely to India, China and the Middle East. They can get around patents much more easily in these foreign markets, and develop solutions without regulatory burden.

Again, support small businesses. Don’t put all the small business support in the hands of the US government. People cannot simply live on government grants, subsidies and mandates to build a business. It will take local support of local companies to rebuild our energy independence.

It is no secret that consumers are suffering from very high gasoline prices. And as a result of these high prices, ExxonMobil just reported a first-quarter profit of $10.7 billion — 69 percent higher than a year ago. The national level of disgust and anger is approaching record levels as we watch the loss of our hard-earned dollars become Big Oil’s gain. The question is, what are we going to do about it?

You know what is ironic is that the press and Obama Administration is going to take away $4 Billion in tax subsidies from “big oil” and just Exxon alone reported a $10.7 billion PROFIT in the first quarter.

Do people really think this $4 Billion tax break for “big oil” is going to make any difference in their profit statement?

I can tell you that reading through the list, it is going to hit small and medium sized companies hard. So Exxon will loose $100 million in tax breaks, is it really going to effect their $10.7 billion quarterly profit? The damage to small and medium companies will suffer for certain.

I’m not saying we should live on tax subsidies, but we do need to compete against other countries who support their industry. You can just see the Chairman and CEO reading the CNN article and Obama’s letter to congress smiling from ear to ear…thinking, “Do these guys really think taking away those tax subsidies will hurt our projected $50 billion dollar profit in 2011. It won’t make a dent!”

Politicians and bankers are the threat to this economy…don’t support eliminating these tax breaks for “big oil”. Go speak to the small businesses and get their perspective. Leave Halliburton and Exxon to play in markets outside the USA where they are moving operations for more profits.

Ok, my last post on this subject. But, as I was reading this article, I could not try to get more people to understand the real problem…it is not Exxon, Chevron or other super majors. They could really never care about losing a $1 billion here or there in tax subsidies in America. Face it.

Don’t believe the US media about how they ignore the real threat to our economy…the untoucable bankers! Read this article.

You want to talk about record profits, and offshore holdings, all guaranteed by the US tax payer…WAKE UP PEOPLE. Forget Exxon, they could care less, focus on the bankers. These guys are untouchable and this is what is going to bring down the economy…not gasoline prices or “big oil” subsidies. If we could only get the average American to spend time turning off the TV evening news, and start educating themselves.

Could you just imagine if every night on the news the reports showed all the banker scandels and enormous money these people are making on trillions of dollars being printed and traded? Several days ago the US Treasury made another MAJOR decision…

Do people really think this $4 Billion tax break for “big oil” is going to make any difference in their profit statement?

The other thing I would point out is that it isn’t a matter of need versus don’t need. It is simple to say that with Exxonmobil’s huge profits they don’t need tax breaks. We could also argue that there needn’t be world hunger, because the oil companies make enough money to feed everyone. But that simply isn’t how business works. In fact, even within a company, they don’t fund a money-losing project simply because the net sum of their profits is large. They fund projects based on the fundamentals of each project.

The question simply boils down to, “What is the impact of removing the tax deductions?” This is the question that those who are so keen to punish the oil industry aren’t asking.

The question simply boils down to, “What is the impact of removing the tax deductions?” This is the question that those who are so keen to punish the oil industry aren’t asking.

Exactly. Do the feds want to incentive domestic production, or don’t they?

And I’ll add a second question…. Punishing the industry for what? For bringing a volatile commodity, whose price it can’t control, to consumers who demand it? If that’s what this is all about, then we should also be punishing farmers (cotton up 168% in the past 12 months, wheat up 66%, corn up 83%), ranchers (wool up 46%), and miners (tin up 75%).

Absolutely we should punish those industries Armchair! They are all evil industries that exploit workers to produce environment depleting commodities and are clearly price gouging. They should be required to keep their costs under control, as exemplified by health care, lawyers, college fees, insurance, etc. You and Walt have it completely wrong – we should be supporting the banks and finance industries, even more than we already are.

They make ridiculous sums of money without needing these physical commodities, and without needing to exploit workers (just customers and taxpayers) , and without even (really) doing anything. That is an economic model that everyone can aspire to, and is clearly the direction the US is going in.

The sooner the country gets away from the old fashioned “physical” economy and into computerised bank offices the better. We just have to sort out what to do with all those people who aren’t bankers, that;s all.

If I was a farmer, I’d be equally happy to be paid to not grow cotton, or corn, or I might even try my hand at the specialised grains, and get paid to not grow , rye, barley, faba beans etc. Could even extend it to biofuel feedstocks, and pay me to not grow canola, camelina, you name it.

Really, I can be a very diversfied farm by being paid to not grow all sorts of crops.

I thought paying people to not do things was the preserve of Mob protection and the like.

At least with things like the IDC, something is actually getting done, which seems kinda like a rare result for gov programs these days.

Do people really think this $4 Billion tax break for “big oil” is going to make any difference in their profit statement?

The other thing I would point out is that it isn’t a matter of need versus don’t need. It is simple to say that with Exxonmobil’s huge profits they don’t need tax breaks. We could also argue that there needn’t be world hunger, because the oil companies make enough money to feed everyone. But that simply isn’t how business works. In fact, even within a company, they don’t fund a money-losing project simply because the net sum of their profits is large. They fund projects based on the fundamentals of each project.

The question simply boils down to, “What is the impact of removing the tax deductions?” This is the question that those who are so keen to punish the oil industry aren’t asking.

RR

Robert,

I was recently involved in meetings with a large company like Exxon, Chevron, etc. They told me that economics on whether to move forward with E&P project is based upon min. $40.00 per barrel oil and in very tight sands $70 per barrel oil. GTL is run at $80.00 per barrel oil. These do not involve any tax credits. Have you heard what tax credits “big oil” needs on projects to make the min. economic go-no/go decision?

In all seriousness, good post RR. I don;t see why it is such a surprise to people that companies that sell a commodity that is demanded by the American people, make a profit doing so. It’s a free country, no one is forcing anyone to use fuel – it just happens to be, by far, the most convenient choice.

No one demands arsenic, or asbestos, anymore, and companies that produced those things don’t exist any more – it’s that simple.

If the demand for oil did what the demand for asbestos has done, I’d say Exxon’s profits would probably go the same direction too.

That is what I call “demand destruction”

In the meantime, if people absolutely, positively demand something, they should not be surprised that someone makes money supplying it to them.

But take note: the ICD doesn’t increase the company’s revenue or profits:

I’m sorry but this statement is idiotic. Of course it increases their profit. It’s also misleading for him to say they must invest this money in drilling to get the break. Oil companies that don’t invest in drilling go out of business. For the most part companies simply take this tax break against drilling they would have done anyway. Only a small fraction of the investment claimed against this credit is incremental drilling.

The explanation of percentage depletion was lacking. It’s the other method, cost depletion, which is similar to deprection of machinery and such. Percentage depletion is different than depreciation or pretty much anything else in the tax code because it provides a cumulative deduction which can exceed actual costs incurred.

Special interests always scream when their subsidies are threatened, and they always raise the specter of job loss. They never mention that taxes not paid by them end up being taxes paid by someone else, costing jobs in some other sector. Green industries are especially bad about this, but you commit the same sin here. The issue is what level of taxation makes sense.

Finally, the claim that oil not produced here means more oil produced in Saudi Arabia doesn’t hold water. All the oil will be produced eventually. Not producing some oil today simply means there is more for tomorrow. If we are really in a peak oil world and oil is destined to become much more valuable in the future, tax policies which delay domestic oil production may be the smartest thing we can do. If, on the other hand, you believe in abiotic oil or that perpetual technical advances will make oil cheaper in the future or that renewable alternatives will make oil obselete then we want our tax policies to accelerate domestic production as much as possible. I have not heard you articulate such beliefs in the past, however.

I’ve run cash flow models for a few large companies. Assuming that they are considering post-tax NPV calculations, the tax credits are almost certainly built into the cash flow model and not specifically identified as a variable. The go-no go decision is not based on any single criteria (although a company will typically look at sensitivities to several critical variables), but on the net resulting discounted cash flow and IRR +/- preferred metrics, as well as other not so easily quantifiable criteria, like fit with strategy, risk, upside potential, timing, etc.

Only a small fraction of the investment claimed against this credit is incremental drilling.

Well, I think this gets to the heart of the debate. How much exactly is this small fraction? If it’s too small, then the fed’s investment in the subsidy is not a good one. I wonder if there are any numbers out there on this?

Another question would be, who is being incentivized? Maybe the majors don’t need it, but maybe it’s far more important for the vast majority of small companies, who tend to drill the smaller targets and lower rate wells. Such a break probably wouldn’t make any difference in the decision making process to a company drilling in deep water for 20,000 barrel per day wells. But it could make all the difference in the world to a company drilling for 40 barrel per day wells, that may make a large percentage of its income from wells doing 15 barrels per day or less. Majors are not likely to be drilling any wells like these.

Suppose, instead of doing away with it altogether, you introduce some sliding scale based on production or income, for example.

Look at it this way. In 2008, the state of California produced 238.6 million barrels from 52,540 wells. That’s an average of 12 barrels per day per well. There are a lot of operators living on the edge out there, and, under the no free lunch principle, any additional tax burdens will affect decisions to drill and the producing life of the well.

In it’s haste to punish large companies for being large, a lot of smaller ones could be hurt.

Percentage depletion allowance violates the basic principles of accounting. It allows the producer to deduct several billion dollars for a field that only cost $1 billion to develop. Outside of oil and maybe some other extractive industries, the principle is that you deduct a percentage of your capital costs from your income each year until the entire cost is amortized. I remember a couple of fairly conservative econ and accounting professors who commented that the depletion allowance is strictly a political benefit for a well-connected industry.
I don’t know whether it is true that this is only a $1 billion annual subsidy for the industry, but obviously, the higher the price of oil, the higher the subsidy.

It allows the producer to deduct several billion dollars for a field that only cost $1 billion to develop.

Wouldn’t that depend on the size of the field?

If the oil industry is getting such a sweet deal, I can’t understand why, out of 215 industries, yahoo finance ranks “oil & gas drilling and exploration” number 117 in p/e ratio, 113 in ROE, and 48 in ROS.

The figures for “Major integrated oil & gas” are number 165 in p/e ratio, 94 in ROE, and 113 in ROS.

Refiners are also stellar performers that deserve punishment. Number 133 in p/e ratio, 122 in ROE, and 165 in ROS.

i think the feds should set a goal of #215 in all three categories by increasing taxes as necessary. Then everyone would be happy, and the industry could go about its business…. somewhere else.

I can’t find your exact source, but PE ratios and ROE ratios are irrelevant. They just show that the market has hyped up the stock values. I wonder what the time period was. 2009 was a down year. And lumping oil and gas together skews the statistics since natural gas prices are down and companies such as Chesapeake have had problems.
Yeah 3 to 1 is a f’rinstance. It could be 1.5 to 1, it could be 5 to 1. But fair and equitable is 1 to1. You depreciate your investment costs. period.

But take note: the ICD doesn’t increase the company’s revenue or profits:

I’m sorry but this statement is idiotic. Of course it increases their profit. It’s also misleading for him to say they must invest this money in drilling to get the break. Oil companies that don’t invest in drilling go out of business. For the most part companies simply take this tax break against drilling they would have done anyway.

How do you know that? Given that each project is evaluated based on its own economic merits, do you believe that taking that incentive away will have no impact on the amount of drilling? It is a specific incentive to drill.

The explanation of percentage depletion was lacking.

I don’t know that much about the depletion allowance. What I tried to do was summarize the categories that CNN identified in their story.

Special interests always scream when their subsidies are threatened,
and they always raise the specter of job loss. They never mention that
taxes not paid by them end up being taxes paid by someone else, costing
jobs in some other sector.

When oil companies make a lot of money — as they have — they pay a lot of taxes. So per your logic, taxes paid by them are taxes that don’t have to be paid by someone else. But I don’t agree with the logic. To me, this is pretty simple. Is this a special interest subsidy? Section 199 certianly isn’t, since all manufacturers qualify for it. Part of the foreign tax credit may be, parts are not. So I view this as a fairness issue; we punish Exxon and leave Microsoft untouched. But there is also the matter of what will actually be accomplished. Will these changes result in more renewable energy and less oil, or will they merely make our oil companies less competitive against foreign oil? I would say the latter, and refinery closings in the U.S. show that the “specter of job loss” isn’t made up.

Finally, the claim that oil not produced here means more oil produced
in Saudi Arabia doesn’t hold water. All the oil will be produced
eventually.

Not all oil is economically recoverable, so it won’t all be produced. My fear is that we marginalize our domestic oil industry, and then we will be even more dependent on foreign oil. I believe 10 years from now we will be in bad shape with respect to oil supplies, and we can pay dearly to our own oil companies, or even more dearly to foreign oil companies if we don’t make sure we keep our domestic industry in good shape.

I can’t find your exact source, but PE ratios and ROE ratios are irrelevant. They just show that the market has hyped up the stock values.

I think they’re certainly relevant in the relative sense. Why didn’t investors hype oil more than almost all other industries if its so profitable? Investors, the same folks everyone accuses of pushing oil prices up, are signaling in the strongest way they know how, with their wallets, that oil has been a mediocre performer.

I don’t think you’d get a significantly different picture as far as the majors go for most years. Refining would look almost consistently gloomy. You say 2009 was a down year. Should we only look at the up years?

And lumping oil and gas together skews the statistics since natural gas prices are down and companies such as Chesapeake have had problems.

This might be true for independents, but not for the majors. They are widely diversified. This is why I also quoted the metrics for the majors alone. And besides, most of the anger is directed at them, not the Chesapeakes of the world.

Also, you’re not considering the time value of money. Some of these projects have very long life spans, into the decades. A recovery of say 15% of your investment in year 32, when discounted by say 10% annually, is a pretty small number.

The test should be simple, conceptually.
1) What does the subsidy cost?
2) What are the returns from it, in terms of govt tax revenues, production increase, energy security, jobs, trade balance, royalties, employment, etc.

If it’s a good return and it makes sense, we should keep the program. If we’re throwing money away, if companies would drill the wells anyway, or if the incentive is too weak, let’s get rid of it. Instead, the main criteria seem to be variants of, “how can we punish the oil industry for profiting in a commodity boom?” I haven’t heard any calls yet to reward them during oil price collapses, and I noticed that there is no such call for punishment when other commodities are booming.

Section 199 certianly isn’t, since all manufacturers qualify for it. Part of the foreign tax credit may be, parts are not. So I view this as a fairness issue; we punish Exxon and leave Microsoft untouched. But there is also the matter of what will actually be accomplished. Will these changes result in more renewable energy and less oil, or will they merely make our oil companies less competitive against foreign oil? I would say the latter, and refinery closings in the U.S. show that the “specter of job loss” isn’t made up.

I am not sure if Exxon is a manufacturer under Section 199. It is possible that Microsoft is a manufacturer. It would be interesting if there are any tax experts here to tell us where the Section 199 tax credit is applied in the financial statements for each company. I fear the tax benefits will not punish Exxon, but will punish smaller manufacturers working with Exxon. I understand the argument that Exxon will not buy American products from our manufacturers if they can get them cheaper overseas… so the tax benefits will support US manufacturers and Exxon both. However, I am not worried about punishing Exxon whatsoever. Large companies have a history of avoiding paying taxes, and paying large bonuses to upper management…watch Wall Street headlines. You would never see this in the oil & gas business with multi-million dollar bonuses paid quarterly and annually like they are to Wall Street bankers.

To remove the manufacturer Section 199 credit in hopes to punish “big oil” is not going to effect them in any real way. They will find cheaper prices in any corner of the world for manufacturing costs. Focus on the bankers to see what they are doing to destroy jobs and this country. They are untouchable if you really look at what they are doing with exemptions and immunities coming out of Washington to protect them.

Does anyone really think high gas prices are the coming downfall of America? I think it will be inflation…even if the Federal Reserve denies it:

“I can’t eat an iPad.” This could go down in history as the line that launched the great inflation of the 2010s.

Back in March, the president of the New York Federal Reserve, William
Dudley, was trying to explain to the citizens of Queens, N.Y., why they
had no cause to worry about inflation. Dudley, a former chief economist
at Goldman Sachs, put it this way: “Today you can buy an iPad 2 that
costs the same as an iPad 1 that is twice as powerful. You have to look
at the prices of all things.” Quick as a flash came a voice from the
audience: “I can’t eat an iPad.”

And Goldman Sacks feels they should not even pay taxes on their bonuses.

“How does Goldman get away
with it again and again? Is it simply bribery? Well, we don’t call it
bribes in advanced economies, since big fish typically have more
complicated and indirect ways of rewarding people who help them out, but
it amounts to the same thing. Or do they have the five by seven
glossies on people in key positions of influence?”

Is JP Morgan going to default this week in the silver markets, or can they be exempted by the USA tax payer.

“The Comex is facing a default, and the powers that be are very nervous since it involves at least one of the TBTF monstrosities. Shock and awe in the thin Sunday night trade, running the stops of
the new futures holders whose options were filled. Even more heavy
handed and blatant than usual.”

While the American public is being diverted to Osama (death) and Obama (birth) we are going to see a LOT more financial issues surface outside the mainstream media. Gas prices are a problem…since it effects practically everyone directly in their pocket book…but the focus should be on what can take down the entire system should it default, and new “reserve” currencies are implemented in an “emergency war against financial terrorism”. JP Morgan could argue it was never their traders that brought down the comex, but terrorists getting revenge for Osama and Obama. I hope 2011 does not turn out to be a financial disaster like September 2008.

Watch for the allegations of “naked short selling” as argued by Lehman Brothers if the Comex has problems.

Short-selling allegations

During hearings on the bankruptcy filing by Lehman Brothers and
bailout of AIG before the House Committee on Oversight and Government
Reform,[55]
former Lehman Brothers CEO Richard Fuld said a host of factors
including a crisis of confidence and naked short-selling attacks
followed by false rumors contributed to both the collapse of Bear
Stearns and Lehman Brothers. House committee Chairman Henry Waxman said
the committee received thousands of pages of internal documents from
Lehman and these documents portray a company in which there was “no
accountability for failure”.[56][57][58]

An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling contributed to the demise of both Lehman and Bear Stearns.[59]
A study by finance researchers at the University of Oklahoma Price
College of Business studied trading in financial stocks, including
Lehman Brothers and Bear Stearns, and found “no evidence that stock
price declines were caused by naked short selling”.[60]

Your last paragraph about conservation/efficiency is spot on. And this applies to all energy consumption, not just oil. I assert that the easiest, cheapest solutions to our energy problems are via conservation/efficiency, but obviously not the only answer. In fact, I further assert that our overall energy problems cannot be solved without very significant reduction in energy consumption. Unfortunately, this gets short shrift in virtually all discussions of energy issues. Perhaps this is because conservation/efficiency is just not “sexy” compared to shiny new PV panels, wind turbines, etc. But perhaps it is really due to the fact that this requires folks to take responsibility for their own actions rather than blaming others.

Responsibility certainly is an issue but considering that many developed countries use much less energy per capita than the US, I think it can be overcome.
The problem with efficiency is that its gains are small and targeted. Take solar power. Anyone involved with have a clear ultimate goal and market, to generate electricity in the market. While many techniques need to be used (e.g. multicrystalline v organic), many of these e.g analyses are one and the same. New ideas come into play and these are used to forward the technology. If you take wind power, the situation becomes even simpler with most turbine manufacturers by and large producing the same equipment with their own tweak.
With efficiency you have to target a specific process. So say we target multicrystalline solar and want to make the process more efficient (and we can do this by targeting saving materials, labour or final cell efficiency). We have to change the esisting process without damaging the final output. We will probably find that specific changes are not transferable to other technologies. Now take the production of different fractions of crude oil. While much information can be traded across the various operations, to effect efficiency changes requires in-depth knowledge of each individual process.

The gains are targeted towards the specific industry and operation involved.

Does anyone really think high gas prices are the coming downfall of America? I think it will be inflation…even if the Federal Reserve denies it

The general cluelessness of the Fed and Wall Street bansksters notwithstanding, there is a huge difference between inflation, with the associated pain and downfall. Yes, 2011 is going to be painful. But we’re a long way from the downfall of America.

Higher gas prices is a reality for the short and medium term future. It’s supply and demand. Let’s hope the high prices bring a feasible alternative to market. If not, extend that outlook to the long term. There is no other way. Low oil price = continued dependence on oil.

That said, your local elected representative is always looking for ways make sort term gains, usually by hurting our collective long term future.

Imagine I take a set amount of money from you by force every year. Then, because I’m such a nice guy, I decide to take a little less. Is this difference money I give you ? Of course not. I’m just taking a little less from you. A tax credit is not a subsidy.

Your last paragraph about conservation/efficiency is spot on. And this applies to all energy consumption, not just oil. I assert that the easiest, cheapest solutions to our energy problems are via conservation/efficiency, but obviously not the only answer. In fact, I further assert that our overall energy problems cannot be solved without very significant reduction in energy consumption. Unfortunately, this gets short shrift in virtually all discussions of energy issues. Perhaps this is because conservation/efficiency is just not “sexy” compared to shiny new PV panels, wind turbines, etc. But perhaps it is really due to the fact that this requires folks to take responsibility for their own actions rather than blaming others.

Responsibility certainly is an issue but considering that many developed countries use much less energy per capita than the US, I think it can be overcome.

The problem with efficiency is that its gains are small and targeted. Take solar power. Anyone involved with have a clear ultimate goal and market, to generate electricity in the market. While many techniques need to be used (e.g. multicrystalline v organic), many of these e.g analyses are one and the same. New ideas come into play and these are used to forward the technology. If you take wind power, the situation becomes even simpler with most turbine manufacturers by and large producing the same equipment with their own tweak.

With efficiency you have to target a specific process. So say we target multicrystalline solar and want to make the process more efficient (and we can do this by targeting saving materials, labour or final cell efficiency). We have to change the esisting process without damaging the final output. We will probably find that specific changes are not transferable to other technologies. Now take the production of different fractions of crude oil. While much information can be traded across the various operations, to effect efficiency changes requires in-depth knowledge of each individual process.

The gains are targeted towards the specific industry and operation involved.

I apologize. In my attempted reply to Moiety I hit send before writing. By efficiency/conservation I was really talking about demand side, not supply side. I use efficiency to mean doing the same thing more efficiently and conservation means simply using less. In general, we discuss supply without discussing demand. The assumption generally appears to be that we meet whatever the demand is without suggesting that end users need to restrict demand. As an example our house uses 5 kWh/day while the average resident in Colorado Springs uses 21 (we also supply 98+% of our needs via a PV/battery system). We do this by a combination of efficiency and conservation. It is clearly possible to use less as demonstrated by Europe, Japan, etc., but this is seldom discussed.

I believe 10 years from now we will be in bad shape with respect to oil supplies,

I know it would take a crystal ball, but what do you define as bad shape? That could mean anything from “mad max” to gas being rationed depending on who you ask. What do you think the world will look like in 10 years?

Doesn’t sound like you buy into Stuart Staniford’s view that Iraq could delay peak oil by a decade.

Does anyone really think high gas prices are the coming downfall of America? I think it will be inflation…even if the Federal Reserve denies it:

Not sure. The Atomatic Earth puts forth a pretty good arguement for deflation. I personally just see stagflation as far as the eye can see, especially since wages are not going up, at least in the West.

I do think the G20 will eventually put forth some kind of solution for our woes that would seem radical at present.

Does anyone really think high gas prices are the coming downfall of America? I think it will be inflation…even if the Federal Reserve denies it

The general cluelessness of the Fed and Wall Street bansksters notwithstanding, there is a huge difference between inflation, with the associated pain and downfall. Yes, 2011 is going to be painful. But we’re a long way from the downfall of America.

Higher gas prices is a reality for the short and medium term future. It’s supply and demand. Let’s hope the high prices bring a feasible alternative to market. If not, extend that outlook to the long term. There is no other way. Low oil price = continued dependence on oil.

That said, your local elected representative is always looking for ways make sort term gains, usually by hurting our collective long term future.

Forget about oil prices. Watch those dishonest prostitutians…

To clarify, I don’t think “downfall” means total collapse and revolution so to speak. I am thinking downfall similar to the Roman empire or the British empire and Soviet empire where the debt and currency cannot be managed…and assets/wealth transferred to those in the right place at the right time. I’m not suggesting anyone can implode the economy, but what I see are some really slick bankers on Wall Street, Central Bankers and Hedge Funds that can push an institution to its knees by naked short selling.

I recognize that few people on this blog believe in naked short selling since congress outlawed it after the collapse, but we all might be surprised at how many people out there break the law rather than follow the law. There are ways around naked shorts if you are domiciled outside the USA, and foreign traders/governments can push the envelope.

My general concern is the downfall of America like other empires that gave their bankers and money lenders the keys to the city. In our case, they now have control over the US Treasury (which they did not have pre-2008), the Federal Reserve and our currency (which a few of them were given exemption/immunity last week). Although most people think these guys are the smartest people on the planet running our financial system, and there is no room for audit, disclosure or transparency, I am not convinced. I think these guys are produced from the same type of University of Chicago economics mold, and it is very easy to spend money showing now return…if money is poured in your lap. It is altogether another thing to manage it to make a return for the shareholders/American public. They get paid a lot of money…FOR WHAT? Destruction?

…..It is no secret that consumers are suffering from very high gasoline prices. And as a result of these high prices, ExxonMobil just reported a first-quarter profit of $10.7 billion — 69 percent higher than a year ago. Not all oil is economically recoverable, so it won’t all be produced. My fear is that we marginalize our domestic oil industry, and then we will be even more dependent on foreign oil. I believe 10 years from now we will be in bad shape with respect to oil supplies, and we can pay dearly to our own oil companies, or even more dearly to foreign oil companies if we don’t make sure we keep our domestic industry in good shape.

RR

Very good post RR and obviously people are thinking and commenting. Yet there is no silver bullet here. If people do NOT wish to purchase liquid petroleum distillates from Exxon/Mobil filling stations – then avoiding their BRANDED products may be the best way to demonstrate serious interference within the volume supply juggle AND these effects would be noticed and quickly. If Exxon’s fuel sales were to drop 70% volumes in a week – their management would notice. So would their shareholders.

Yet the real issues remain like foreign oil imports, wars for oil, rapidly escallating price for this basic commodity and bizzillions of dollars leaving the USA [and other nations] on a one-way ride to other parts of the world. These daily dollars spent for foreign sources of petroluem don’t become recycled again in any sort of economic trickle-down within a nation’s own domestic economy. These dollars (or Dinars) are gone like the wind with each fillup.

So producing new domestic source volumes becomes the logical key while also working to achieve zero population growth curves! And what new domestic sources of liquid fuels might make investors more money while simultaneously improving the environment?

I sound like a stuck record sometimes when I keep reminding people that ALL OILS FLOAT ON WATER and don’t easily biodegrade [even edible plant oils and animal fats]. It is water soluble, oil soluble, coal soluble OXYCARBON alcohols which America and other nations are sorely lacking in significant volumes. Not just more volumes of $4-$5 gasoline distilled from black HYDROCARBON crude oil. Remember last summer’s Gulf Gusher and its resulting long-term effects which are not at all interpretable yet.

@ Mark – you do realise, don’t you, that if you and SACA are successful, and profitable, then you too will be labelled as evil incarnate!

One wonders if a ”clean tech” biofuel company was making Exxon size profits today, would they be pilloried too? I tend to think they would be – they would be being accused of gouging the people just the same as big oil. Any claims about CO2reductions, or even domestic jobs, would likely fall on deaf ears if fuel is expensive enough – which it likely will be.

I’m sure all drug addicts hate their dealers and accuse them of making obscene profits too – but how many are willing to go cold turkey?

@ Mark – you do realise, don’t you, that if you and SACA are successful, and profitable, then you too will be labelled as evil incarnate!

Paul: It all depends upon what price a new biodegradable liquid fuel was being sold for. AND also who owns the firm which produces it… I do note that E-85 fermented corn ethanol blends are presently selling for about 50¢ cheaper than low-grade unleaded in Colorado. I routinely stop by these yellow-handled E85 pumps and spike my gasoline to 25% and 35% volumes of biodegradable ethanol.

What might people say or feel if the same NEW domestic FUEL production FIRM was community owned?

What IF such a E4™ GTL BioFUEL FACILITY was purchased by local citizens themselves via a municipal bonding mechanism? What if these new fuel volumes were not imported from across the world and instead were simply produced as a direct and profitable result of recycling the community’s own solid waste products via gasification [without a smokestack] and then catalytically highgraded into E4™ mixed alcohols which feature 20% more BTU’s and 30 more octane points than corn ethanol – and produced at 1/4 the cost of fermented EtOH?

Personally, I doubt that the citizen owners of a new, decentralized municipal fuel facility like this would be labeled as evil incarnate! My guess is that more citizens would like to own stock in something like this and share in the annual dividends just as Exxon’s shareholders are now doing with another fuel product.

I have not purchased three tankfuls of Exxon gasoline since the Valdez incident occurred in Alaska 22 years ago. So I’m personally not contributing to their 69% jumps in first quarterly profits this year.

Mark, while I hope that the community based model comes about -you would still need to sell the fuel at or close to the “market price” – unless you pursued an alternative structure like a “members only” reduced price. Then if you did sell it at your 1/4 price you would probably have very happy members – while everyone else then labels you as evil for “not sharing” !

I’m not so sure about a municipal bond system though – seems to me like that is a complication you wouldn’t want – based on the way it doesn;t work in California. Municipalities should stick to municipal affairs, and leave business to business, IMO. Same could also be said of higher levels of government too.

Let’s see, Exxon noticed that Russia wants to use its natural gas as a political weapon, thereby creating a market for the investor willing to risk his own money. You have a problem with that?

What might people say or feel if the same NEW domestic FUEL production FIRM was community owned?

You are going to take on capitalism? Good luck with that! I hope you can do so without my investment or tax $$$.

…and instead were simply produced as a direct and profitable result of recycling the community’s own solid waste products via gasification…

I’m all for that. But how much fuel (gal/cap.d) can you produce that way?

I have not purchased three tankfuls of Exxon gasoline since the Valdez incident occurred in Alaska 22 years ago. So I’m personally not contributing to their 69% jumps in first quarterly profits this year.

That’s nice. But I think you’re confused. These guys sell to each others retailers all the time, I believe. There really isn’t too much difference between the brands, other than some much ballyooed additives. Exxon thanks you for continuing to drive…

If Exxon’s fuel sales were to drop 70% volumes in a week – their management would notice. So would their shareholders.

Oh no, not that dumb idea again. Here’s what would happen, if you could pull it off:
1. The Indie stations would mark up their prices, a natural free market response to increased demand.
2. The brand stations would reduce their prices, again a natural free market response to lower demand.
3. Most buyers would return to the brand stations en masse.
4. Prices would return to pre-dumb exercise levels.

…while also working to achieve zero population growth curves! Go away, Malthus! You’ve been wrong for 200 years. You are going to take on capitalism? Good luck with that! I hope you can do so without my investment or tax $$$.

Gee, I didn’t mean to distract this thread by mentioning new liquid volumes of something other than petroleum distillates for the planet. Maybe Optimist is a GenXer covered with tatoos? Just kidding.

I invited you to privately email months ago to discuss your specific questions offline and you haven’t. I won’t go very deep with annonymous posters on this public blog. Sorry. See ya… Unmask, join up and

[I have not purchased three tankfuls of Exxon gasoline since the Valdez incident occurred in Alaska 22 years ago.]

Have you also boycotted retailers who use Exxon products in order to get their products to a location you can drive to?

No Mr. Armchair: I’ve personally just passed by [one of] the largest oil company[ies] on earth after its disaster in Alaska which caused so much harm to so many different species, only some of them two-legged. I can’t help it if my mailman combusts Exxon or the semi-truck delivering groceries.

Malthus remains a joke. A sick one at that. The guy was obviously no scientist: there is an easy explanation for what he observed. He observed exponential human population growth in the new world (the USA), but not the old world. The meaning: old world technology increased the population density that could be sustained in the new world, relative to new world technology before the arrival of paleface. Eventually exponential growth ceased in the new world, as populations approached the limits of what the technology could support.

Q: So why the hysteria?

Conclusion: as long as we keep developing new technology, we can keep increasing the viable population of any area, and the planet as a whole. And even if we don’t, population growth seem to naturally follow, not precede, technology.

So cut the whining about popularion growth curves. I can’t wait to see all the cool things that the new scientists and engineers will be inventing. Who knows? It might even include a feasible renewable energy. Maybe even a renewable fuel that floats on water…

after its disaster in Alaska which caused so much harm to so many different species, only some of them two-legged.

You should boycott airlines too. Hundreds of two-legged species are killed annually, often by human error.

I can’t help it if my mailman combusts Exxon or the semi-truck delivering groceries.

No you can’t. But in participating in the local economy, you are just about as guilty as anyone. Especially when you consider, as was pointed out to you, that you ARE in fact buying Exxon gasoline, you just don’t know it. Not buying at their branded outlets may be a satisfying gesture, but as Optimist noted, it will have no impact. Not even if millions did it.

I don’t mean to be critical because your optimism and idealism are good things, but 1) I don’t think anyone posting on here is a single-minded promoter of fossil fuels, and 2) we have to be realistic about alternatives and about the fossil fuel industry: if we limit ourselves to simplistic good guy-bad guy theories of energy, it’s not going to be very helpful to anyone.

…if we limit ourselves to simplistic good guy-bad guy theories of energy, it’s not going to be very helpful to anyone.

Amen to that. I suspect that is one of the issues that gets RR riled up: painting Big Oil as evil only.

I believe Big Oil will be the guys to bring a feasible renewable fuel to market, if they don’t invent it as well. Think about it. They have huge cash reserves. If the oil supply is indeed running low (I’m still not sure), they will just make more money. So if anybody invents a feasible alternative, what would stop Big Oil from buying the invention? They have the resources to bring it to market, and do so at maximum convenience for the end user: imagine a biofuel that is completely miscible with existing fuels and has the same properties. Afterall, there has to be a reason we keep using the same liquid fuels…

Unfortunately, those darn prostitutians see it as their mission to keep pretending they are angry with Big Oil, when they are not asking for their campaign contribution.

But like I said, and Benny proved, when it comes to Big Oil, no conspiracy theory is too crazy to hold water…

Optimist, agreed. If I were CEO of Exxon, I think I’d really be like the idea of taking OPEC’s market share in BTU’s by developing, or buying, a competitive biofuel. Seems like a better strategy to me than trying to fight against a better mousetrap. But this is also a common theme among the tin foil hat crowd.

I do note that E-85 fermented corn ethanol blends are presently selling for about 50¢ cheaper than low-grade unleaded in Colorado.

CarbonBridge~

But even at that price, you’re paying more per BTU when buying E85.

Isn’t it funny how the price of E85 tracks up staying in synch with the price of gasoline, even though only 15% of each gallon is gasoline? One could almost think the ethanol producers are taking advantage of the increased price of gas. In fact, one might even say they are “price gouging.”

I do note that E-85 fermented corn ethanol blends are presently selling for about 50¢ cheaper than low-grade unleaded in Colorado.

CarbonBridge~ But even at that price, you’re paying more per BTU when buying E85.

Isn’t it funny how the price of E85 tracks up staying in synch with the price of gasoline,

Ahhhh, I like combusting some stronger EtOH blends and at 3x or more the normal consumer volume. This higher volume blend tells me every time that this mixture is not as “strong’ as something else c/o Pandora.. And I feel good buying some fuel at less than the ‘other’ sticker price when a pickup fillup today [one 26 gal tank] runs into the high $80′s. The plastic debt check recycles and stops at $75. However I do understand the lower BTU differential here. Yet it is biodegradability which motivates me above all other aspects – kinda like making the extra effort to recyle glass, plastic, paper, etc., from the kitchen and not feed it ALL to the landfill.

Mark, you do realise that you are breaking the law, every time you do a 1/3 mix of EtOH, right? Even though Kit P said he would consider doing this as an act of civil disobedience, you still don’t want to get thrown in the slammer or pay a $2500 fine for a Federal offence!

Putting unauthorised mixes of clean burning alcohol fuels in a car is obviously a serious threat to the very existence of the country, or at least, the oil co’s.

Robert: We’re getting sloppy here. A tax deduction (tax break) is not a subsidy. A grant is a subsidy. Some federal programs involve subsidies. The process of levying and collecting taxes is, by its nature, coercive. It is the process whereby the sovereign confiscates part of the revenue stream created by profit seeking entities. Some would take it all but they recognize that if they did, pretty soon there would be no revenue stream. So, they only take part of it and in deciding how much to take they allow businesses to recover their costs. Imagine that. Part of the hoohaw about tax breaks arises from what constitutes a “cost”. But you know all this. Taxing (or not) of intangibles, depletion allowances for extractive industries, depreciation schedules are all part of the definition of “cost” for tax purposes. About as soon as the sovereign learned to tax, it learned that it had a powerful tool for directing human behavior and much of the complexity of the tax code arises from this impulse. New laws are not required (indeed, perhaps could not be enacted). All that’s needed is to change the tax code. Those taxed recognize this too and if they have enough influence can affect changes to their benefit. Many try to guard against this and are somewhat successful but constant attention is needed. Along with this we must continually give thought to what it is we really want in this country and how we relate to the rest of the world and that includes awareness of the pernicious effects of many of the decisions made that affect the economy. Too many take the form of “the results don’t matter, it’s the idea that counts” and this, in my opinion, is the primrose path.
GC

Conclusion: as long as we keep developing new technology, we can keep increasing the viable population of any area, and the planet as a whole. And even if we don’t, population growth seem to naturally follow, not precede, technology

So going by that, if technology reverts back a few notches, the population must follow, no?

Robert: We’re getting sloppy here. A tax deduction (tax break) is not a subsidy. A grant is a subsidy. Some federal programs involve subsidies. The process of levying and collecting taxes is, by its nature, coercive.

Hi Gordon,

While I agree with that, some would argue that any tax deduction is by nature a subsidy. I didn’t want to get into that argument, so I simply explained the nature of what kind of “subsidies” we are talking about here. I described the manufacturer’s tax deduction, so regardless of whether someone believes a tax deduction is a subsidy, they can at least see that this is what we are talking about as opposed to a grant.

So going by that, if technology reverts back a few notches, the population must follow, no?

No. If technology reverts, there would be a powerful (read: profitable) incentive for the entrepreneur to provide users with the luxury some have become used to. Someone will find a way, provided the prostitutians don’t force a half-baked solution (like E85) on all of us.

But pray tell, how would technology revert back a few notches? Are we all going to develop collective amnesia? How would that ever happen?

Oil prices are set on the NYMEX. Not by oil companies. OPEC and oil-exporting nations have limited the supply of oil through manipulation and incompetence. Ironically, the USA has played a major role in oil prices, by preventing Iraq and Iran from developing thier fields in years past. That is probably 12 mbd locked in right there–enough to glut current demand.

The CNG and PHEV cars offer the best way forward.

I think large polluted cities–Los Angeles, Denver, Bangkok etc–would be within their rights to start penalizing ICE cars, or at least ICE liquid fuel cars.

My gues is that within 10 years, the PHEV will become very competitive. Batteries are improving at about an 8 percent annually compounded rate. I would not even mind a PHEV-all ethanol engine car. The car would use so little ethanol, we might be able to supply it all ourselves, sans imports.

The “Global Warming Policy Foundation” (which boasts a number of impressive thinkers, and not to be confused with your average bunch of tree-hugging loons, and includes Freeman Dyson who is an IPCC critic) has produced this paper on shale gas:

Hat tip to Benny – the summary sounds like it could have been written by you in your “boom no doom” persona. Among other things it makes the case that shale gas could make important inroads into the transport sector.

I’m with armchair here a tax credit is a government financial instrument that encourages certain behaviour.

Subsidies and tax credits are the opposite sides of the same coin, which we could collectively call incentives, but we are really just playing with words. The end result is the same – wealth is transferred, one way or another, from the government to the recipient, in return for doing something.

The question really is, is the something good value for the money, and would it have happened anyway?

Pete S- I have been a “boomer” for several years, after I thought over the price signal, venture capital funds, and man’s incredible inventiveness.

I have down days when I consider government, especially in places like Nigeria, Russia, Venezuela, and possibly even China (political freedom, anyone?). I think man will make wonderful progress even with mediocre governments (like ours). When you get to bad governments….

BTW, I have to respond the Mac’s post. The Lincoln MKZ is another incredible commercial development. The hybrid gets 41 mpg city. A luxury car!

LIncoln:
The Hybrid is equipped with a standard 2.5-liter, I4, 156-horsepower, hybrid engine that achieves 41-mpg in the city and 36-mpg on the highway. A variable speed automatic transmission with overdrive is standard.

I have been a “boomer” for several years, after I thought over the price signal, venture capital funds, and man’s incredible inventiveness.

Like I’ve stated before, that much we agree on. The end of civilization may be near, but it’s got more to do with greedy prostitutians that with a shortage (or perceived shortage) of any particular resource. You keep up the good work, Congressman! I always knew you were a man of principle. The my-side-is-always-right-regardless-of-the-consequences principle…

Oil prices are set on the NYMEX. Not by oil companies.

Technically that statement is correct: it’s the market, not the oil companies that set oil prices. As RR also points out, by global standards Exxon is a small player.

But the implication that it’s just a bunch of speculators that set oil prices is patently ridiculous. That any individual could set the oil price at a level he likes is even more laughable. The volatility in oil prices over the last few years shows that nobody is in control, including the much maligned OPEC.

Also, Benny, you express faith in the markets and specifically the price signal. Yet when the price signal starts flashing red, you sleep with the lights on and start looking under the bed for Putin and/or a bunch of speculators.

That is probably 12 mbd locked in right there–enough to glut current demand.

And a high price might just be the signal that brings that oil to market.

My gues is that within 10 years, the PHEV will become very competitive.

My guess is that in 10 years PHEV sales would still trail hybrid sales by ~80 – 90%. Even with all those advances, the battery still weighs a lot.

Mark, you do realise that you are breaking the law, every time you do a 1/3 mix of EtOH, right? Even though Kit P said he would consider doing this as an act of civil disobedience, you still don’t want to get thrown in the slammer or pay a $2500 fine for a Federal offence!

Putting unauthorised mixes of clean burning alcohol fuels in a car is obviously a serious threat to the very existence of the country, or at least, the oil co’s.

Paul, this is hot off the press today.

Colorado Petroleum Distributors to Pay $2.5 Million to Settle Clean Air
Act Allegations of Illegal Mixing and Distribution of Gasoline

WASHINGTON – The U.S. Environmental Protection Agency (EPA) and the U.S.
Justice Department today announced a settlement with Rocky Mountain
Pipeline System, LLC, Western Convenience Stores, Inc., and Offen
Petroleum, Inc. to resolve claims that they illegally mixed and
distributed more than 1 million gallons of gasoline that did not meet
Clean Air Act emissions and fuel quality requirements. The companies
will pay a $2.5 million civil penalty and conduct an environmental
project designed to offset the harm caused by their failure to meet
federal gasoline quality requirements. Gasoline that does not meet Clean
Air Act standards for fuel can result in increased emissions from car
tailpipes, which can harm Americans’ health, affect vehicle performance,
and in some cases can damage engines and emission controls.

The markets are beginning to watch companies like a hawk now…more disclosures are coming. If anyone knows about this company history…ExxonMobil is a puppy dog.

“While the rich seams of copper that lie deep in the ground beneath
Mufulira have helped to make Swiss-based Glencore the largest and
wealthiest commodities trader in the world, the African townspeople are
still struggling to get by on just a few dollars a day.”

Then, we jump from the world largest trader in commodities, to one of the world most shady traders of silver.

“The investigations stem from a story in The Post, which reported on
a whistleblower questioning JPMorgan’s involvement in suppressing the
price of silver by “shorting” the precious metal around the release of
news announcements that should have sent the price upwards.

It
is alleged that in shorting silver, JPMorgan sells large blocks of
silver option contracts or physical metal — actions that would bring
down the price of the metal — closely following news that would
otherwise move the metals higher.”

I saw that ad too – it would lead you to believe that Exxon invented shale gas!

It did make me wonder, now that the oil majors are getting into domestic NG in a big way, and promoting things like this, if we won’t soon see a concerted approach by them for the adoption of CNG vehicles. Would solve two problems for them – it would create new demand for NG, which seems to be in an increasing glut, and thus would possibly give them a better return than chasing new international projects, where they are increasingly being shut out by NOC’s. Would also allow them trumpet more domestic energy production, which they are already doing judging by all these commercials

The last time I was in Germany there seemed to be solar panels everywhere. I don’t know how they got there … but it would appear that they are taking alternative energy more seriously than we are here. Whether it is policies that influence naked capitalism or a more cooperative approach would be interesting to know. Whatever it is, it seems to be working.

Robert Rapier said:

I understand that some believe that singling out the U.S. oil industry for punishment would help level the playing field for alternative energy companies. I think the dream of many is that if we make U.S. oil companies uncompetitive, the alternative energy sector will flourish and make up for the lost production from the oil industry. The future can be cleaner and greener and the only losers will be the oil industry. This is an incredibly naive view. In fact, look at the situation in Europe. Gasoline costs $8 to $10 a gallon, and cars are still predominantly fueled by petroleum. And it will be the same in the U.S. if gasoline rises to $10 a gallon.

That is because the German government has massively subsidised all those solar panels. As soon as the government couldn’t afford the subsidies anymore, they stopped going up. Something like $60bn spent.

Subsidies aside, given the average capacity factor for solar in Germany is only 11%, you have to question the value of doing this. They would have been better of, in theory, to pay for the panels to go up in Spain, where the capacity factor is 22%, and get the electrcity from there.

If you subsidise anything enough, it will become economical for someone, but that doesn’t make it a good allocation of resources – often it is the opposite.

Subsidies aside, given the average capacity factor for solar in Germany is only 11%, you have to question the value of doing this.

Paul,

Yes, is does seem rather iffy. There is also the question of Germany’s high latitude — even more than the populated parts of Canada. From the beginning of November until the end of March, daylight hours in Germany are short, the Sun doesn’t get very high above the horizon, and it is almost always cloudy. The huge investment Germany made in solar panels may have created a lot of jobs, but it did practically nothing to lower the base load capacity Germany needs.

That capacity factor is a real number from a real report on renewable electricity in Germany, but I can;t be bothered to find the original. It was an eye opener though, to think of the hundreds of MW of expensive solar panels that have been deployed in a place where they will only produce half as much as elsewhere – that is how subsidies distort reality!

I have read another report that showed half of the UK’s wind turbines were not in “good wind” sites – they had ben built where it was easiest, and easiest to get approvals, to get the subsidies while they were available!

Germany also encourage the solar companies to set up manufacturing and R&D there, which they did. Then, in an entirely predictable act of system gaming, when the companies had used Germany’s money for R&D to make a new type of panel, that needed a re-tooling of the factory, the closed down the factory and built the new one in China.

Some assessment showed that Germany had not produced any “economically significant” (=unsubsidised) jobs from the entire program. But there are many panels that will be getting high feed in tariffs for 20 yrs – I’m sure the young Germans will love paying for that.

…they had ben built where it was easiest, and easiest to get approvals, to get the subsidies while they were available!

Paul,

I’m familiar with that where I live. In order to get the subsidies and tax breaks an energy company had to get their wind farm up in running in only about six months. They went to a very rural part of the state with no political resistance where they only needed to convince the town board, and where the farmers were eager to have the steady income they could get by leasing the 80 ft x 80 ft parcels each wind turbine needed. The energy company made their construction deadline and got their government money, but since the wind farm has been complete it has been operating at only about 20% of rated capacity.

The really annoying thing about this is that, as so often happens, a well intentioned government program ends up paying for inefficiency. Those solar panels and turbines will be inefficient for the term of their natural lives. These shenanigans have tarred the entire renewable energy sector with the same brush.

I’m not quite sure what the right subsidy structure is, if any, but clearly the current ones are not working very well.

For wind, they got paid a bonus on completion, so the wrong incentive exits, which is to get one up, in a hurry, anywhere. should be on a per kWh basis, so the incentive is to find good sites. Even better would be on a daytime kWh basis, as no one really needs more night time power.

For solar, the problem is, of course, that nowhere in Germany is that good – they are literally backing the wrong horse here. they paid so much per kWh (about 50c) that no one needed to find good sunny sites.

It is a function of the bureaucratic approach that money spent = results achieved, and in the real world it is money made=results achieved. Also, in the politicians world it is money spent = votes gained, I would like to see the voters get to a point where money NOT spent = votes gained.

If the purpose of renewable energy is to use less fossil fuel, it is not working anyplace.

Most wind and solar systems have a zero capacity factor. The do not work. The best incentive is a production tax credit. You only get paid an incentive for producing electricity. A PTC must large enough so that with the O&M cost it is less than the cost of the electricity it off sets.

However, the problem with wind and solar is not cost. It takes a lot of effort to keep power systems running. Resources are focused on meeting demand on cold winter nights and hot summer days. If a nuke plant trips off line, the work force is mobilized to get it working. It a wind farm is damaged by a wind storm, it will get put on the ‘to do’ list to be done when the ‘mobile’ work force has no important work.

If the purpose of renewable energy is to use less fossil fuel, it is not working anyplace

Well, not quite. There are plenty of hydro plants out there, and the biomass ones too – which actually contributed more energy to the US last year than did wind.

But for wind and solar – yes, a lot of cost for little contribution.

The PTC approach is effectively what a feed in tariff is – it is just that when someone will pay you 80c to produce something that is worth 5c, lots of decisions are made that benefit the recipient of the 80c, and deliver negative value to the whole system. While Ontario Power is wasting money on that, they have nuke plants sitting idle waiting for maintenance, and aging coal plants that need refurbishment/replacement, and nothing is getting done.

With the exception of California, it seems most other jurisdictions in the US (and Canada) are a bit more sensible about things.

Russ, you missed the word ‘most’. It is not my job to defend solar. When solar and wind industry associations issue press releases, they talk about how much stuff the sell (capacity) not how much electricity they produce. I will be glad to read any data you have on the performance of systems over time.

One of the reason I am an advocate of utility scale PV systems is that they are more likely to maintain the systems and produce more electricity. If your job is making electricity you put effort into doing a good job. If your interest is something else all you learn from your PV system is that a little bit of a cheap commodity is really boring. Furthermore, there are no press releases for a system not working.